Calif. Legislative Analyst ‘Calls Bull’ on Newsom Budget Projections

Last week, California Governor Gavin Newsom presented a $297 billion 2023-2024 budget plan on Tuesday, with a projected deficit of $22.5 billion. He shaved $3 billion off his last budget, in the face of a recession, and the $22.5 billion deficit.

In November, the Legislative Analyst’s Office reported California revenue is $41 billion below expectations, likely resulting in a massive $25 billion shortfall in the upcoming 2023-2024 state budget – on the heels of reveling in a $31 billion surplus? How?

“Gavin Newsom (D-Fantasyland) got a reality check from the Legislative Analyst on Friday, when the nonpartisan office called for greater spending cuts and disputed the Governor’s contention that the state won’t face a recession in the coming years,” reads a press statement from the California Assembly Republican Caucus. “Legislative Analyst Calls Bull on Newsom Budget Projections,” the title says.

This is Priceless.

But they are right. The Legislative Analyst’s Office did indeed present a report to the governor recommending other cuts, and offering their solutions to the Legislature if the governor won’t budge.

The LAO identifies these problematic areas with Gov. .Newsom’s budget projections:

• $14 Billion in Higher Revenues
• $3 Billion in Higher School and Community College Spending
• A $4 Billion Set‑Aside in the SFEU. The Governor proposes the Legislature enact a year‑end balance in the Special Fund for Economic Uncertainties.
• $2 Billion in Discretionary Spending
• $800 Million in Other Differences

Specifically, the Legislative Analyst’s Office is concerned that Gov. Newsom is planning for spending more despite lower revenues. They say it a little differently: “Our estimates suggest that there is a good chance that revenues will be lower than the administration’s projections for the budget window, particularly 2022‑23 and 2023‑24. Nonetheless, the Governor’s budget trigger restoration proposals implicitly place more emphasis on revenue upside—suggesting the administration anticipates that revenues are more likely to be higher, not lower, than their current projections.”

Could Gov. Newsom have a serious case of recession budget denial?

The Legislative Analyst says:

“Recent budgets have allocated or planned tens of billions of dollars for one‑time and temporary spending purposes in 2021‑22, 2022‑23, and 2023‑24. The Governor’s budget identifies one set of recent augmentations to reduce or delay in order to address the budget problem. The Legislature can select entirely different spending solutions. To assist the Legislature in this effort, we have provided a list of large augmentations provided in recent budgets in Appendix 4 and a set of criteria for evaluating them for reduction or delay in “Chapter 2” of this report. The Legislature could apply these criteria through its budget oversight hearings throughout the next few months.”
 
The LAO’s report describes a “heightened risk of recession” and urges the Legislature to “plan for a larger budget problem by identifying more spending reductions,” the caucus said.

The LAO said:

“As the Legislature works to address the budget problem, we suggest policymakers consider the unique impacts of inflation on each of the state’s major spending programs in conjunction with possible budget solutions. (See our report, The 2023‑24 Budget: Considering Inflation’s Effect on State Programs, for more information.) 
 
“Meanwhile, economists surveyed by the Wall Street Journal say there’s a 61% chance of the economy tipping into recession within the next year,” the caucus said.  
 
“If the governor and legislative Democrats don’t accept the reality that the economy is in trouble, middle-class Californians will pay the price for their fiscal recklessness,” Assembly Republican Leader James Gallagher (Yuba City) said.

Here’s one area the LAO lays out as a problem – “new discretionary spending”: “The Governor’s budget also includes $2 billion in discretionary spending proposals that are not currently reflected under current law or policy,” the LAO reports.

“In addition to addressing a budget problem, the Governor’s budget proposes $2 billion in new discretionary spending mainly in capital outlay financing, resources and environment, and other miscellaneous program areas. Because of revenue shortfalls, these new spending amounts contribute to a larger budget problem and necessitate additional budget solutions. That is, for each dollar of new proposals, another dollar of solutions would be required. While the Legislature might share some of these priorities, it need not adopt all, or even any, of the associated proposals. Rejecting them would reduce the budget problem and the number of solutions necessary.”

Assembly Republican Leader James Gallagher is right, and it is likely to be worse based on the Wall Street Journal survey of economists:

• Economists expect GDP to stagnate this year, posting growth of just 0.2% in the fourth quarter of 2023 compared with the fourth quarter of 2022.
• Employers are expected to cut jobs starting in the second quarter through the end of the year.
• Economists view high inflation, and the Fed’s efforts to tame it, as a top risk to the economy this year.
• When asked which category of inflation will be the hardest to tame in 2023, a quarter of economists picked housing. A further 18% said healthcare and another 18% picked personal services.
• Economists in the survey expect the Fed will need to raise the benchmark federal-funds rate target to 5% this year, in line with central-bank officials’ own projections.

The perfect storm for a recession may be upon us with high inflation, high taxes, high energy costs, high food costs, a sizable budget deficit, and now tens of thousands of big tech layoffs, which is the other issue California lawmakers and governor need to address. Meta, Twitter, Salesforce and now Amazon are all cutting thousands of staff. The potential for, or early economic ramifications to the cities and counties in which they reside, as well as the state, and the ripple effect these could have on startups and investment banks, looks to be immense.

The Governor’s 2023 May Budget Revise is going to be interesting.